Stifel Downgrades 3 Medical Office REITs As Rising Rates Pressure Cost Of Capital, Investment Spreads

A rising interest rate environment is wreaking havoc on many sectors, including real estate investment trusts. Higher interest rates and compressing cap rates have increased the cost of capital and narrowed investment spreads for medical office-focused REITs, prompting Stifel to downgrade three stocks in the space.

The Analyst

Analyst Chad Vanacore downgraded his ratings on each of the following names from Buy to Hold and made the following price target changes: 

• Healthcare Realty Trust Inc HR: price target trimmed from $30 to $28
• Healthcare Trust Of America Inc HTA: price target lowered from $32 to $27.
• Physicians Realty Trust DOC: price target reduced from $18 to $17.

The analyst also lowered his outlook for the medical office building REIT segment as a whole to Neutral on the basis of his view that growth will slow and better value can be found in the health care REIT sector.

Healthcare Realty To See Slower Growth

Stifel lowered its 2018 and 2018 funds from operations estimates for Healthcare Realty and reduced its acquisition assumptions for the company, as the impact of rising interest rates and a low cap rate compress investment spreads, making external growth "largely uneconomical."

Healthcare Trust of America's Rental Revenue Growth Pushed Out

For Healthcare Trust of America, Stifel updated same store growth to 2.3 percent and lowered its operating margin estimate by 50 basis points.

Stifel reducd its 2018 and 2019 FFO estimates by 6 cents and 5 cents, respectively.

Slower Acquisitions, Higher Interest Expenses To Impact Physicians Realty

Stifel lowered its 2018 FFO estimate for Physician Realty by 2 cents and for 2019 by 3 cents to account for slower acquisitions and higher interest expenses.

The Price Action

Here's how the stocks have performed year-to-date:

• Healthcare Realty Trust is down 14.7 percent.
• Healthcare Trust Of America is down 16.5 percent.
• Physicians Realty Trust is down 16.2 percent.

The REITs closed the Wednesday trading session as follows: 

• Healthcare Realty Trust lost 1.55 percent to $26.67.
• Healthcare Trust of America was down 1.86 percent at $24.32. 
• Physicians Realty Trust slipped 1.09 percent to $14.51. 

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